Opinion: Airbnb and Uber face not only business, but also regulatory, hurdles

SAN FRANCISCO (MarketWatch) — Investors are digesting a new wave of offerings from Silicon Valley: so-called “sharing economy” companies such as home-sharing service Airbnb Inc. and ride-sharing service Uber Technologies Inc.

Both are nearing the late stages of their start-up youths. It won’t be long before they hit the public markets — all grown up.

There’s been a wave of debate about the validity and legality of these companies, which participate in what’s sometimes known as the “collaborative economy.” Many officials, including New York State Attorney General Eric Schneiderman, question whether they are slick, technology-disguised attempts to circumvent regulation. Uber, after all, operates in the highly regulated world of taxi and limousine service; Airbnb in the hotel and lodging industry.

For investors, there is a more fundamental question: Do these companies deserve some of the lofty valuations being assigned to them in the marketplace?

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Uber reportedly is in talks for a new round of funding that would value the company at $10 billion. Airbnb, which has completed seven rounds of funding, is valued at a similar level. And there are others coming up right behind them, including loan service Lending Club ($3.8 billion).

Sharing-economy companies pose a significant problem for investors. They may try to use traditional fundamentals such as revenue and earnings growth to assign a value to these new businesses. But that may not reflect their full potential — or their potential pitfalls. There are unique, critical questions about the friction these companies are creating as they rub up against the traditional old guard. To use an overused Silicon Valley term, sharing-economy companies have the potential to be truly “disruptive.”

For instance, every car-sharing vehicle on the road reduces the number of vehicles people own by nine to 13, a revenue loss of $270,000 to the average auto maker, according to a June 2013 report by Jeremiah Owyang, a consultant and researcher at Altimeter Partners.

Traditional companies are trying to get ahead, or at least even, with the sharing wave. Toyota Motor Corp.
TM, +0.90%
is experimenting with a sharing program off their new car lots. Outdoor clothing company Patagonia has worked with an online sharing marketplace called Yerdle.

For the investor, the shift is stark. There is tremendous growth potential for sharing companies. At the same time, there is an equally enormous potential for loss for companies wedded to the traditional model.

That’s, of course, where the regulatory questions arise. Sharing companies may indeed offer greater value (and it is value more than a desire for global good that drives sharing-economy customers), but they do so without the regulatory safeguards built into the traditional system.

In that way, the sharing economy struggles with the same issues facing bitcoin, the crypto-currency that has been criticized for its facilitation of money laundering and criminal activity as well as a lack of safety for its buyers.

For currencies and sharing businesses, these could be growing pains or fatal flaws.

Ultimately, the sharing economy’s ease-of-use and value proposition to consumers is likely to win out. Technology always drives commercial change. But as investors know all too well from the dot-com bust, timing is critical. Companies such as Uber and Airbnb are at a critical stage where they must not only prove an untested business model, but navigate an existing business and regulatory structure.

Like Amazon.com
AMZN, -0.11%
and Webvan, there will be winners and losers from the new entrants. Like Borders and Wal-Mart Stores Inc.
WMT, -0.25%
there will be traditional companies that can’t adapt and those that can.

Until there’s more clarity around sharing models that work and those that don’t, investors probably shouldn’t read too much into the valuations they’re seeing. Uber may indeed be worth well more than $10 billion if it can transform the industry and expand its services.

Or, it just may run into a regulatory ditch. And the ride will be over.

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